Chip-industry executives expect profitable growth in 2014 — and that China will be their biggest market in 3 years

The boom and bust cycles of the semiconductor industry have been notorious, causing big ripples in the prices for gadgets that consumers and enterprises buy. But since the recovery of the global economy from the financial crisis of 2007-08, the going has been smoother. And chip industry executives are optimistic that they will see profitable growth in 2014, according to the annual Global Semiconductor Industry survey from audit, tax, and advisory firm KPMG.

The chip industry remains a bellwether for the growth of the electronics industry and the global economy, as chips are in everything electronic. That confidence remains strong even as the industry shifts from the dominance of the PC to the growth of mobile and a host of other new uses for chips. But the momentum behind the expectations is weakening.

“It’s not quite as optimistic as it was a year ago,” said Gary Matuszak, the global chair of KPMG’s technology, media and telecommunications practice, in an interview with VentureBeat. “But overall they foresee a good year. One thing we see is a much broader base in the future for the applications of chips.”

The World Semiconductor Trade Statistics group anticipates the chip industry will grow 4.1 percent in 2013 and another 4 percent in 2014, and that prediction is in line with the KPMG survey results. Overall, the chip industry tracks closely to worldwide gross domestic product growth.

Above: Chip industry confidence is good, but momentum has stalled.

Image Credit: KPMG

It also expects that China will surpass the U.S. as the top market in the world in the next three years, and the chip industry plans hire more workers there than in the U.S. in the next 12 months. The survey polled 193 semiconductor industry leaders about their level of confidence in the chip sector. The confidence index remains flat compared to last year at 57. That reflects a positive view of the industry’s growth, but it suggests the momentum from a year ago has waned. Last year, confidence rose from 46 to 57.

“Muted optimism best describes the semiconductor outlook for 2014, and lower levels of anticipated revenue growth reflect more short-term uncertainty than a year ago,” said Matuszak. “We see reductions at the upper ends of growth predictions yet higher percentages of respondents predicting modest improvements. This reflects both the industry’s penetration into broader applications and broader geographic markets, resulting in less volatility combined with a slowing growth rate for mobile devices.”

Three out of four semiconductor executives say that their company’s revenue growth will increase next year. But those expecting revenue to increase more than 10 percent dropped by a third.

On the other hand, business leaders are more optimistic about annual profits. Seventy-eight percent say industry profitability will increase over the next year, compared to 71 percent in 2012. The chip executives expecting 6 percent to 10 percent growth in profits jumped by almost 50 percent.

About 56 percent say the U.S. is the most important market in the next year, while 55 percent say it is China. As far as hiring goes, 59 percent said China was most important, and 48 percent said the U.S. was the most important. India came in at 31 percent and South Korea at 31 percent.

For the next three years, chip industry leaders expect applications to broaden, signaling less dependence on wireless communications, consumer electronics, and computing. The most important revenue drivers are expected to be mobile technology (69 percent), consumer (66 percent), computing (63 percent), alternative or renewable energy (63 percent), industrial (62 percent), automotive (60 percent), medical (55 percent), and wired communications (55 percent). In autos, electronics that detect body patterns, such as detecting whether you are getting sleepy, are expected to be a growth area.

Many executives expect the number of global merger and acquisition deals will increase in 2014. Seventy-three percent expect an increase, compared to two-thirds last year, in mergers and acquisitions. Matuszak believes there will be a lot fewer startups.

“Chip development can cost $100 million,” he said. “How many startups can afford that?”

When it comes to research and development, three out of four executives expect it to increase in the next year. About 81 percent said they also expect semiconductor research and development spending to increase three years from today. The technology has become so complicated that bigger R&D investments are almost a given, Matuszak said.

“The broadening of applications markets can lead to more diverse revenue sources and lower likelihood of feast or famine cycles,” says Ron Steger, KPMG global semiconductor practice leader. “As computing declines in relative importance for the semiconductor industry, the companies that had the foresight to identify and invest in emerging application markets such as automotive and medical, as well as devices that enable the emerging internet of things, will be well-positioned to enjoy competitive advantages”

Steger said tablet sales are expected to grow 36 percent in 2013, and smartphones will grow 40 percent. But eventually, the growth rates will decline. He thinks the industry diversity is much better now compared to the unhealthy reliance on the PC in years past.

Matuszak said the internet of things and wearable technologies are commanding a lot of publicity, but the numbers of units are still pretty small for the newest gadgets in those categories.